Playing it by the book: A strategy for success?

Introduction

In 2019, the Government released an updated version of the “Outsourcing Playbook”[i], a guide to Central Government bodies on the correct approach to commissioning services from the private sector or bringing them in-house for delivery.  The initiative was prompted largely by the collapse of Carillion in 2018.  Carillion had been a critical contractor to the public sector and its liquidation caused significant disruption to service delivery across a number of critical projects.

The V1.0 of the Playbook set out a number of safeguards aimed at good practice in contracting with a view not only to avoiding a repetition of the problems of contractor insolvency but also the improvement of decision making and implementation of contracts.  The structure comprised an overarching policy document with accompanying annexes targeting specific subjects. V2.0 builds on the original, with guidance in new areas and expanded advice on some of the original topics.  In its new, expanded form the package comprises the Playbook itself, accompanied by eleven in-depth “Guidance Notes”, which cover specific topics and a number of templates to assist in its implementation.

We have discussed some of the key changes below, and in conclusion explained why we consider the Playbook to be important for suppliers and public bodies alike. 

Scope: What is an “outsourced service”? Who is the guidance addressed to?

Commonly the term “outsourcing” is used to mean an outsourced process or function (e.g. payroll, reception services).  However, the scope of the guidance is wider.  For the purpose of the guidance, outsourcing means “any public service obtained by contract from an outside supplier”.  This gives some idea of the extensive scope of the guidance.   

The Outsourcing Playbook is aimed at Commercial, Finance, Project Delivery, Policy, and any professionals across central government departments and arm’s length bodies who are responsible for the planning and delivery of public projects.  “Arm’s length bodies” (also referred to as Non Departmental Government Bodies) include such entities as HMRC, the DVLA, Highways England, OFSTED, Public Health England and Network Rail[ii].

What’s new?

The most significant updates address the following areas:

1. Delivery Model Assessments

Delivery Model Assessments (DMAs) are covered in summary in the Outsourcing Playbook and the subject of in-depth commentary in a supplementary Guidance Note[iii].  DMAs are especially required for new projects or developments in the way services are delivered.  However, they are good practice for all projects. 

Central government departments must conduct a proportional delivery model assessment (also known as a “make versus buy” assessment) before deciding to outsource, insource or re‑procure a service.  This exercise is critical as it assesses the risks and costs of service model delivery.  It drives evidenced‑based, analytical decisions and can help address the different challenges that come from outsourcing or insourcing a service, or one of its components. 

Emphasis is placed on the importance of investing time to consider possible solutions, structures and the most appropriate modes of service delivery.  Key stakeholders should be consulted at the outset.  The Guidance Note gives a helpful summary of the key benefits of outsourcing as opposed to in-house delivery and assistance in identifying when one model may be more appropriate than another[iv].

Prior engagement with stakeholders – potentially including private sector suppliers - is encouraged in the Delivery Management Guidance Note and in a number of other places in the overall guidance[v].  The Playbook notes that suppliers will be well placed to share input on risks and potential solutions[vi]. This guidance is welcome.  Part of achieving the most successful outcome is understanding what the market can offer.  Specifications must be drawn up in a way that does not exclude the most innovative potential services but remain targeted towards the needs of the purchasing authority. 

The “make” element in “make versus buy” is a reference to the possibility of insourcing services, i.e. the service being provided from within the authority rather than by an external supplier.  The guidance is clear that the same principles should be applied in evaluating the strengths and weaknesses of this option.  We have previously assisted suppliers who have been unhappy that a decision to insource services they were previously providing has been taken too quickly, without their being allowed to make representations and/or consult with service end users.  Following the Playbook to allow the incumbent supplier (and potentially other interested putative bidders) to share their experience should go some way to addressing these deficiencies in process and ensuring a more holistic, and realistic view of service delivery. 

2. Piloting First Generation Outsourcing

Where a service is being outsourced for the first time, there is a presumption that a pilot should be run as part of a programme of testing.   Detailed guidance on this aspect of outsourcing is set out in a separate Guidance Note[vii]. 

Piloting recently came to the fore in relation to HM Government’s Coronavirus “track and trace” application, where localised trialling on the Isle of Wight highlighted a number of significant deficiencies and led to changes to the intended program.  Within our own practice, we are also aware of pilots being launched to test innovative service programs being launched by our clients. 

Piloting a service delivery model is considered the best way to understand the environment, constraints, requirements, risks and opportunities. Pilots also provide a wealth of quality data and can help inform technical specifications.

Before the actual piloting begins, it may be appropriate for the purchaser to engage in preliminary trialling processes such as trial programmes and proofs of concept.   A pilot will usually be the final stage of testing a delivery model prior to the full roll-out of new services. It usually involves the implementation of the proposed services on a localised basis, with the purpose of ironing out operational and logistical issues in advance of the large-scale roll-out of services. Addressing issues in a pilot phase can save an authority the cost of having to alter service delivery after roll-out. Increasingly, as practitioners, we are seeing the adoption of piloting before procurements are commenced. 

3. Building and Maintaining Successful Relationships

Effective engagement with suppliers at all stages of the contract life-cycle is seen as key to delivering successful outcomes.  This begins with contract mobilisation and departments are advised to allow adequate time for mobilisation. 

During the delivery phase, execution of services must be monitored effectively and robustly by the contracting authority.  This requires the appointment of a suitably qualified contract manager who must have a good understanding of the services and underlying requirements. 

Periodic reviews should be carried out of performance, although it may be appropriate for these to be led by a party removed from the day-to-day relationship with the supplier, in order to guarantee objectivity and remove the risk of “optimism bias”.   In other words, although trust between the parties is paramount to building successful relationships, building too close a relationship with a contractor and its staff can lead to being blinded by shortcomings in their work.

4. Protecting Service Delivery from Insolvency: Resolution Planning and Financial Evaluation

The revised Playbook introduces a requirement for suppliers of critical public service contracts to provide resolution planning information.  This is effectively a continuity plan in the event of the supplier’s insolvency.  It is a clear response to the unhappy experience relating to Carillion and its aftermath.  This is linked to guidance on evaluation of financial standing in our view so we have examined these two subjects together. 

4.1 Financial evaluation and monitoring

The EU and UK public procurement rules allow public purchasers to conduct checks on the financial status of bidders with a view to ensuring – to the extent practicable - that the supplier is likely to be able to complete the contract.  

The Playbook and a supporting Guidance Note[viii] provide insight on how this process should be conducted.  The more critical the contract and the services provided under it, the more stringent the assessment will be (contracts are tiered into “gold”, “silver” and “bronze” for these purposes).  Purchasers are advised to have recourse to a wide range of forward and backward looking financial data on individual bidders: such as credit agency reports, accounts.  For contracts in the “gold” and “silver” tiers, bidders can expect to be submitted to a series of complex ratio tests, as set out in the Appendices to the financial evaluation and monitoring Guidance Note.   

In some respects, this represents a departure from procurement advice predating Playbook V1.0, which had been issued by the now defunct Office of Government Commerce (“OGC”)[ix].  That guidance cautioned against overreliance on mechanical ratios.  In fairness, however, the Guidance Note provides that bidders will in many instances be given the opportunity to present representations for disagreeing with the ultimate financial stability assessment.

One area where we feel the guidance could have been improved relates to the assessment of private equity backed companies.  Typically, private equity companies carry high levels of inter-group or inter-company debt.  However, we feel this is an overly cautious view as such debt does not necessarily represent a threat to the overall stability of the business, given that the creditor is an entity with a vested interest in seeing the company succeed, if only to increase the value of the business for possible re-sale.   That point had been covered in the previous guidelines, issued by the now defunct Office of Government Commerce[x].  Those guidelines advised public bodies:

“consider whether interest-bearing debt is inter-company or provided from an external source. Inter-company borrowings are less likely to pose the same level of risk as external borrowings”[xi].

This is to be contrasted with the approach taken in the current Guidelines in relation to Metric 3a, 3b and 4[xii]”.  Those metrics are tests to be applied in relation to bidders for “gold” and “silver” tier contracts, which stipulates that for the purpose of the test: “[b]orrowings should also include balances owed to other group members”[xiii], without making any differentiation.   This misses the obvious point that a parent or sister company is far less likely to wind up its sibling than other creditors. 

Refreshed and expanded guidance on financial evaluation is separate from that on resolution but shares a desire to avoid insolvency related disruptions.  Financial standing evaluations are themselves not a cure to insolvency related disruptions given these evaluations occur at the shortlisting stage. While they can (and do) lead to the exclusion of suppliers seen to have insufficient stability at that stage of the process, purchasers are reminded that the financial situation of a company can deteriorate quickly and for that reason must be kept under periodic review during the implementation phase of the project. 

4.2 Resolution planning

Resolution planning is effectively continuity planning for dealing with the possibility of the insolvency of the supplier.  That can cause disruption for example because the administrator or liquidator moves to terminate contracts, which in turn can lead to a loss of critical services or threaten public infrastructure.  The Guidance is applicable to new procurements by Relevant Authorities of “Critical Service Contracts” and other outsourced service contracts with an estimated value exceeding £10m per year.

Key to resolution planning is the provision and maintenance of “Corporate Resolution Planning” Information .  This is information which both the public and private sector parties are expected to create or assemble related to solvency risk and addressing insolvency events.  On the supplier side, the supplier will be expected to hand over details of its corporate group and its plans for continuity of service provision, either by one of its other group entities or by a third party supplier.  The supplier should also consider the position of its sub-contractors; if any sub-contractor is critical to delivery of services, the supplier should have a plan to arrange to substitute the sub-contractor if it suffers an insolvency event[xiv].  The public sector information will include the feasibility of an emergency re-procurement following supplier insolvency, likely substitute suppliers and their appetite for replacing the stricken contractor.   

Conclusion: Why does the Playbook matter to purchasers or suppliers?

The Playbook can easily be dismissed as just another set of non-binding guidelines.  However, such an assessment would overlook the depth and comprehensiveness of the publication across so many areas, and the real life scenarios it has had to address.  The content of the Government’s advice clearly reflects a willingness to seek prevention rather than cure, and a move to more proactive and sophisticated way of looking at procurement in the public sector.   

While V2.0 of the Playbook is non-binding, it can be expected to continue to yield considerable influence on purchasing by Central Government departments, just as its predecessor did.  The Playbook will shape how and when they engage with private sector providers, as well as what they buy and the structure of contracts.  In some respects, the Playbook presents opportunities, such as encouraging the public sector to consult more willingly with suppliers at a pre-tender stage about their requirements.  This is helpful as it is essential that the private and public sector continue to work together to ensure robust service delivery and relationships moving forward. However, in other areas (such as resolution planning and financial standing) there remains challenges and scope for additional work to be done. 

Although the Playbook is addressed to Central Government departments, it is likely to be of interest to other bodies such as government agencies, local authorities, NHS Trusts and entities covered by the Utilities Contracts Regulations 2016.  The authoritative nature of the text means that it will be considered a first port of call for guidance on best practice in government contracting.  Where advice from the Playbook has not been followed by a public body, it may wish to keep a record of why that was.  If a challenger seeks a judicial review in a procurement context, it may point to any departure from the guidance as evidence that the body in question has failed to act with due care or diligence.     

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[i] The package of guidance is available here. The Playbook itself is available here. 

[ii] For more guidance on Arm’s Length Bodies, please see here.

[iii] Delivery Model Assessments.

[iv] See p.14 of Guidance Note.

[v] See for example Outsourcing Playbook at p.42 and the Market Management Guidance Note at p.11 – 12 (recommending market engagement as a means of assessing competition within a market.

[vi] See p.16 of the Outsourcing Playbook.

[vii] Testing and Piloting Services Guidance Note.

[viii] Assessing and Monitoring the Economic and Financial Standing of Suppliers Guidance Note.

[ix] “Office of Government Commerce Supplier Financial Appraisal Guidance”, available here.

[x] “Office of Government Commerce Supplier Financial Appraisal Guidance”, available here. 

[xi] OGC guidance at [3.37].

[xii] See p.29, 32 and 44 of the Guidance Note.

[xiii] See p.29, 32 and 33 of the Guidance Note.

[xiv] Guidance Note at [2.5.21].

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This article was written by Paul Henty and Megan Paul. Please contact Paul at paul.henty@crsblaw.com or Megan at megan.paul@crsblaw.com for more information.